SUPPLIER PERFORMANCE - Key to supply chain success
The Problem. Ask yourself these questions, regardless of whether you are a wholesaler, retailer, manufacturer, distributor or even a 3PL trying to manage a supply chain for a client.
- How well does your supply chain work?
- How do you measure your supply chain performance?
- Does the performance measure align with the company's strategy, goal and direction? (Note we are talking about key metrics, not a plethora of measures for measures sake.)
- Do you have customer service problems because of a lack of the right product/inventory?
- What are your inventory turns, overall and by category?
- How many dollars of inventory are tied up in inventory-by age?
The answers, especially if they are negative or poor answers, can significantly impact how well the company does or does not build shareholder value, increase profits, add to market share, or build scale.
Often, supply chain performance and customer service results correlate to inventory. Inventory-lack of velocity, poor turns and too many dollars tied up-is both a problem and a symptom of a problem. It does not matter where the inventory problem resides-in raw, WIP or finished goods. The issue is not just a matter of managing the inventory on-hand. It is a matter of how to improve supply chain and customer service while improving inventory-velocity and turns and reducing dollars-at the same time.
This is not a contradictory or impossible challenge. The inventory failures shown above usually go beyond forecasting or demand planning. They start and end with supplier performance. Not surprisingly, many companies with inventory problems do not have a sourcing strategy as part of its supply chain management effort. These companies focus primarily, if not exclusively, on price, landed or contract.
Performance is not a concern. Yet analysis of supplier performance shows that often suppliers, for over 25% of purchase orders, fail to ship or deliver on-time. The effect of such service failures ripple through the business with customer service problems, too many dollars tied up in inventory, serious aging of inventory, poor turns and poor return on the capital investment required for the inventory, larger than needed warehouse space in terms of capital tied up and/or reduced warehouse productivity from having to travel extra distance around the excess inventory.
Sometimes, for orders shipped on time, there may be quality problems. Poor quality brings its own set of customer service, inventory and other costs and problems.
The Solution. Think of the dollars tied up in inventory as more than product that creates sales or gathers dust in the warehouse. Think of inventory as part of the company portfolio. Too much capital, too much investment, in inventory lessens the value of the division and/or company. In turn, this lessens the return for shareholders. The underlying objective and strategy may be diluted or sidetracked. All this can restrict the ability to develop, exploit or implement strategic alternatives or options.
Companies should have a strategy that tells how it will outperform the competition in terms of customers, products or services. It positions where the business will be long-term. Strategic sourcing and supplier management (SSSM), as a component of supply chain and operational effectiveness, should be an integral element of that strategy. The firm should perform this differently and better than competitors. This approach can create competitive advantage and be sustainable.
Steps to developing a Strategic Sourcing and Supplier Management program include:
- Analyze spend
- Identify suppliers as to importance as measured in importance-volume or profit margin, long lead-time, how critical, stringent specifications and how strong or weak each. (Note, not all products from an important supplier are critical.)
The Krajlic model can be used for this step
- Segment how you will work with critical suppliers from non-critical ones
- Build, manage and maintain relationships with key suppliers.
- Define desired relationship for each supplier, ways to evaluate the relationship, plans for evolving that relationship and specific goals to be achieved.
- Understand what suppliers want from you.
- Recognize and mitigate the risk as you proceed for both the supplier and you.
- Implement supplier relationship management.
- Collaborate with prime suppliers as to potential new products.
- Partner with them as to pricing and stable product availability.
- Gain extended resources from key strategic suppliers for market research, supply, pricing, spot market situations and other areas.
- Streamline across the supply chain.
- Manage spend
- Manage contracts
- Measure relationship with agreed upon metrics that complement company strategy
- Meet regularly with important suppliers with a mutual agenda.
Depending upon your practices and history with suppliers, implementing SSSM will take time. The program should start "small" and grow.
The benefits to customer service, reduced inventory, warehouse productivity and other areas can be dramatic and significant. It complements sales and operations planning (S&OP). SSSM and supplier performance are required for and should be implemented into Lean because
- too many suppliers works against lean and create waste
- waiting for product deliveries is waste
- inspection may be waste
- inventory includes waste
- suppliers are important to accomplishing pull
- suppliers have a key role in kanban
Conclusion. Firms that do not have a procurement strategy, firms that overemphasize price without regard to performance, firms that do not manage supplier performance, are hoisted by their own petard. They create unnecessary customers, sales, operations and inventory problems.